Liam Dann: Technology key to global expansion

Agricultural sector is highly innovative and needs to make greater headway in world markets.

Even with plans for more irrigation there are clearly limits on how much dairy New Zealand can produce. Photo / Sarah Ivey

We're putting the focus on agriculture this week in the Business Herald.

It is not that we ignore the sector and like to grab any opportunity we can to wow people with the enormous scale on which the sector operates in this country.

Despite all the urbanisation and technological change of the past century we're still dealing with a dry summer as one of the biggest single external factors weighing on the nation's GDP growth.

In 2008 we were the first Western nation into recession, not because of the global financial crisis but because of drought.

What Fonterra does everyday in every corner of the world is staggering. More than 20 billion litres of milk collected every year, 16,000 staff in more than 100 countries. In the year to June 30, 2012 it earned revenue of almost $20 billion and paid out $9.6 billion to farmers before posting a $624 million profit.

This one company accounts for 20 per cent of all New Zealand's export earnings.

But given that kind of scale it is almost impossible to give it the weighting it deserves in print. It is a reasonable gripe of those in the farming sector that New Zealand's business community looks forward to the next big thing and underplays the strong platform agriculture provides for economic growth.

That kind of outlook hasn't been helped by dominance of co-operatives within the agriculture sectors. Fonterra, Kiwifruit grower Zespri and our largest meat exporter, Silver Fern Farms, all operate farmer owner models.

But that is changing. Fonterra is now effectively listed on the NZX through the Fonterra Shareholders Fund.

The units (investors don't get a voting share) were issued for $5.50, debuted on market at $6.60 and on Friday they closed at $7.42. The giant co-operative's first foray on to the stock market seems to have been a great success. Whether farmers will judge it a success in terms of providing liquidity and cashflow they are looking for while maintaining the strength of the co-operative remains to be seen.

As part of the focus this week we'll look at the growing number of investment opportunities in the sector

We'll also look at the financial challenges facing the industry with regards to capital investment, borrowing and farm property prices.

And we'll look at how technology such as the Rural Broadband Initiative is changing farming, and we'll profile technology companies that have grown out of the rural economy.

Despite what seems like an unending reliance on commodity exports the agricultural economy is one of the most highly innovative in the country - both in terms of the efficiency of our farmers and the food technology being used to add value to our produce.

Adding value to products to boost export returns remains one of the biggest challenges. That story is not new and it is easy for commentators to attack the sector for an over reliance on commodity exports. But given the huge volume of production involved, shifting the balance of earnings is no easy task.

It has been a stated aim for Fonterra since its formation in 2000. But running slightly counter to that goal the dairy sector has a golden run in terms of global commodity prices. The rise of Chinese consumption has massively boosted world demand for dairy. Before Fonterra's formation, food commodities were in a long slump which was widely interpreted as a structural decline. The past decade has seen a reversal of that and that has bought the industry time to continue evolving. But evolve it must.

Even with plans for more irrigation and growth in the dairy sector there are clearly environmental limits on how much dairy New Zealand can produce.

We need an industry that is engaged in technological innovation and global expansion.

Fonterra is doing both but it has also found that bigger rewards mean bigger risks when you head into the highly competitive world of branded consumers products.

Investor focus will push co-operatives to produce bigger profits and that means more focus on the consumer end of the market.

That's a good thing. New Zealand agricultural production has been world class for generations but it is time for the sector to push on.

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.